Supervalu's (SVU) woes include missing analyst earnings estimates , pension liabilities, struggling to reduce the excessive debt that it took on due to the Albertsons acquisition, and the recent suspension of dividends. Apart from the above mentioned difficulties, another important one is the competition it faces from discounters like Wal-Mart (WMT) and Target (TGT), peers like Safeway (SWY) and Kroger (KR), and a slightly higher-end specialty chain - Whole Food Market (WFM).
The present economic scenario, with uncertainty regarding the persistent high unemployment in the U.S., has led consumers to turn their heads towards discount chains to save what little they can. It is therefore no surprise that every retail chain is introducing offers like everyday low pricing. Supervalu, a wholesaler and retailer of food products and groceries operating under multiple store brand names, has also started to work on price cuts, which would undoubtedly take their toll on the already depleted margins. Significant price cuts are difficult to achieve because the economic situation has already led to inflation in food costs, which are difficult to pass on to consumers in light of the tough competition.
Supervalu runs 1,102 tradition retail outlets and 397 large discount stores under the name "Save-a-Lot". This means roughly an area 61 million square feet. Wal-Mart has the largest retail space of approximately 1 billion square feet 55% of its sales come from grocery. Safeway has 79 million square feet of retail space from its 1,675 stores as of March, 2012. 76% of its net sales come from perishables and non-perishables. Kroger has 2,435 stores, with sizes ranging from 63,000 to 165,000 square feet.
In its fiscal 1Q this year, Supervalu reported a profit of $0.19/share, which is 46% down from the same period last year, when profits were $0.35/share. This quarter's profitability also missed analysts' expectations of $0.38/share. Quarterly revenue growth is -5% at present.
Below is a graph showing SVU's stock price performance since the 2008-09 recession times, compared to those of its competitors and peers.
The following points show that customers left SVU in favor of SWY, KR and WMT.
- Change in market share for grocery stores:
Wal-Mart had a market share of 13% among grocery stores in 2002. It showed the largest increase by reaching 33% in 2011. Kroger's share was 7.2% in 2002 and it went on to become 11% in 2008, and then ~13% in 2011. Supervalu's share increased from 2.7% to 8% in 2008. This 8% includes the acquisition of Albertsons in 2006 (that had a 5% share in 2002). Safeway's market share of 4.8% in 2002, increased to 7% in 2008.
- Below are a table and a chart showing how the stores fared in terms of same store sales during 2011, and the first half of 2012. Supervalu is clearly the loser here as well. Its decline in same store sales has been continuing for the last three years (i.e. -1.2% in 2009, -5.1% and -6% for year ending February 2011). Even the discount "Save-a Lot" chain has posted a decline of 3.4% in comparable store sales in the first quarter this year.
Note: Fiscal year 2012 is the calendar year 2011.
- WMT is able to leverage its position as the biggest retailer in the world to get much lower prices from its suppliers compared than others. Moreover, it emphasizes low cost throughout its value chain from production to distribution. To achieve this, Wal-Mart is closely integrated with its suppliers to manage inventory and sales. These lower costs are passed on to customers, who, being more price sensitive nowadays, opt for going to Wal-Mart.
Financial Performance and Valuations:
SVU has a very high short ratio of 15, and 46% of its float is short. This means that investors were expecting the stock price to decrease. It is 40% down during the last 12 months. We do not recommend to short SVU at the moment, due to already cheap valuations (a lot of unfavorable news regarding SVU has been priced in), and might see some sort of rebound in case positive results come from its turnaround strategy.
Supervalu said it plans on reducing $250 million in admin and operational expenses in 2014, which would likely include layoffs. It had $1.06 billion cash from operations for the year ending February 2012, which will give it some cushion against the $1 billion debt it has to repay in next 2 years.
The next 5-year growth rate for SVU is 11%. EPS for the current year is expected to be $1.29/share and $1.34 for fiscal year 2014.
According to Supervalu CEO Craig Herkert, suspending dividends and capital expenditures are necessary to cut down prices in order to successfully compete against competitors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
